Are the troubles over for Swedish banks in the Baltics – or have they only just begun?

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Swedish banks – especially Swedbank and SEB -- have paid a heavy price for lending to the Baltic region during years of red-hot growth. Last year Swedbank, SEB and Nordea lost 26.4 billion kronor ($3.7 billion) related to bad loans in the Baltics.

Economists say the worst may be over for the Baltics and the banks expect the economic situation to stabilize as Estonia, Latvia and Lithuania are leaving the immediate crisis behind.

Latvia's stark recession eased in the fourth quarter of 2009 while Estonia bounced out of recession, new statistics showed. Sweden’s Finance Minister Anders Borg said earlier this week that the situation in Latvia, Estonia and Lithuania is “considerably better than it was 3 months or 6 months ago”.

So are the troubles behind? Can the banks let the guard down? Not quite yet, Peter Malmqvist, independent stock market analyst, told The Swedish Wire.

“Credit losses are so tremendously big that it will take many many years to reach normal levels”, he said.

With credit losses in the Baltics as huge as 20 percent it’s a long way to go to get back to normal levels of around 0.6 percent.

Swedbank’s chief risk officer Göran Bronner said in a conference call that the bank still faces high risks in Latvia and Ukraine despite economic improvements there.

"I think that Latvia is still a risk area--they have an election year and, even though the economics are improving and have done so in the past quarter, I think there are still a lot of risks around," he said, Dow Jones Newswire reported. "Also, Ukraine is a continuous risk area for us, especially in the development of sovereign risk pricing in the market place," he added.

Despite recent uplifting statistics, Estonian economic growth may remain subdued for several years as government austerity measures to prepare for euro adoption undercut domestic demand, the Baltic Business Wire wrote. Meanwhile Latvian officials say that Estonia's adoption of the euro will worsen the economic situation in Latvia and affect Latvia in the early stage.

Last month Sweden’s Riksbank First Deputy Governor Svante Öberg said Swedish lenders continue to face risks stemming from their operations in Latvia, Lithuania and Estonia.

“Developments in the Baltic countries represent an ongoing problem for the Swedish banks”, he said.

Up till now Nordea, the Nordic region’s biggest bank, has been largely shielded from the worst of the economic crisis as the bank only has about 3 percent of its lending in the Baltics. But the bank said in its fourth-quarter report that "loan losses could remain at a high level also in 2010, as it is difficult to forecast when loan losses will start to decline."

Skandinaviska Enskilda Banken, Sweden's third-biggest bank, said asset quality in the Baltics are improving and that it sees “a clear improvement in the Baltic countries". Also the country’s fourth largest bank, Swedbank, said that economic situation was looking up, especially in Latvia and Ukraine, and that it just might be able to swing back into the black this year.

"We are more confident in the macroeconomic stabilisation in the Baltic region. The past due volumes in all three countries have in principle stopped during the second half of 2009", said Annika Falkengren, chief executive officer at SEB. "In the absence of any significant macroeconomic setback, the provision for credit losses should develop favorably during 2010".

Latvia, a former Soviet republic of 2.2 million people, is in the deepest economic crisis in the European Union. Its economy contracted by an estimated 18.4 percent in 2009 compared with the previous year. However, Latvia's stark recession eased in the fourth quarter of 2009, as the economy contracted by 3.1 percent compared with the previous three months, the Baltic state's statistics office said Wednesday.

Estonia bounced out of recession in the fourth quarter of 2009, as the economy expanded by 2.6 percent compared with the previous three months, an official estimate indicated on Thursday.

Swedbank made total credit losses of 14.9 billion kronor in the Baltics last year, SEB 9.6 billion kronor and Nordea 1.9 billion kronor, according to a sum-up by Dagens Industri.